Uncertainty and the volatility forecasting power of option‐implied volatility
Sung Won Seo and
Jun Sik Kim
Journal of Futures Markets, 2020, vol. 40, issue 7, 1109-1126
This study investigates the impact of uncertainty on the volatility forecasting power of option‐implied volatility. Option‐implied volatility is a powerful predictor of future volatility, particularly during periods of high uncertainty. This is consistent with option‐implied volatility being largely determined by volatility‐informed traders (rather than directional traders) when uncertainty is high. New volatility forecasting models that incorporate such interaction outperform benchmark models, both in‐ and out‐of‐sample. The new models also better predict future volatility during the 2008 global financial crisis, for which benchmark models perform poorly. The results are robust to alternative choices of benchmark models, loss functions, and estimation windows.
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:40:y:2020:i:7:p:1109-1126
Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314
Access Statistics for this article
Journal of Futures Markets is currently edited by Robert I. Webb
More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().